5^th Annual ESG Survey Results

Roman Dubczak: Hello, everyone. I’m Roman Dubczak, Deputy Chair at CIBC Capital Markets. Environmental, Social and Governance, or ESG factors are increasingly being integrated into investment screens of institutional investors globally. Each year, CIBC Capital Markets sends out an ESG survey to leading fixed income and equity investors to gauge how they’re incorporating ESG risk and opportunities into their investment portfolios. We recently concluded our fifth annual survey garnering over 70 responses. Here with me to give further insights into today’s survey findings and into the current state of ESG in Canada, is Shaz Merwat, ESG Equity Research Analyst. Shaz, happy New Year. Last year’s survey, the fourth survey that we conducted, we were able to conclude that ESG factors had become mainstream in the mindset of institutional investors. How would you conclude that this year survey went, and what did we learn from it?

Shaz Merwat: Yeah, I’d say that it remains mainstream. I mean, from the survey we saw that 80% of investment mandates in Canada have some sort of an ESG overlay, and that was true both on the fixed income and the equity side. And really, you know, when we were looking at the range of strategies, they’re all still what you would expect. Integration remains the most common. So for me, the takeaway was, we did see a lot of politicization of ESG, especially in the US last year. But according to the results, that doesn’t seem to have had much of an impact here in Canada.

Roman Dubczak: All right. That’s good colour. And it’s good to see the Canadian mindset regarding ESG as a focus. Outside of that, were there any other notable changes in this year’s survey? Either a continuation of a prior theme, or perhaps beginning of a new thread of some sort?

Shaz Merwat: Well, I mean, one of the most striking data points for me every time we do the survey is really to look at ESG scores and really the use of ESG scores. And I think that’s a continuation of a theme in that ESG scores are really of limited use to investors. In fact, 80% of survey respondents said that they either do not use an ESG score or use ESG scores in limited fashion. And probably even more strikingly, no one had an ESG Strategy built entirely off just an ESG score. And really, I attribute that probably to two things. Firstly, ESG scores, they can be difficult to decipher. And a lot of times they’re not consistent amongst the different data providers. So it can be quite difficult to know exactly how to use them. And then secondly, we’ve now gone through three years of ESG kind of taking off. Asset managers have been hiring ESG personnel, and they’re just much better staff now to do their own internal research. Actually, that was one of the takeaways from the survey. Internal research is the most common data source for ESG investors, followed by issuer based disclosure. So taking all that in, you’d probably have to say ESG scores, they probably will continue to decline in use even further over time.

Roman Dubczak: That’s good color Shaz. I know a lot of our corporate clients have been mystified as to how their scores are calculated and how that comes together for them. So it’s interesting that that phenomenon is actually maturing, so to speak. And I recall our partner Ian de Verteuil did a famous piece few years ago where he was able to look at the Scores of Russian oil companies versus Canadian oil companies. And the Russian oil companies scored higher than the Canadian oil companies because they didn’t take governance into effect. So quite remarkable. So given where things are, Shaz, you know, any insight as to how investors should be navigating the world of ESG and what they should be looking at?

Shaz Merwat: Yeah, I mean, I remember that report Roman, and listen, it’s just one of the challenges with ESG investing. And I think that element of it will just probably always be a bit of a work in progress. You can have conflicting data on ESG being good on the ‘E’, but poor on the ‘G’.I think at the end of the day, investors are just going to have to have their own internal ranking to know which ESG metrics for them are more material than others. But, you know, coming back to the survey and your question, you know, actually we did see a bit more of a balanced allocation the different E,S and G themes last year. In the survey, last year, we saw investors spend as much time on governance issues as they did on environmental issues. It was about just slightly under 40% for both. And prior years, it’s been the environment that’s taken up the majority of investors time. So that, you know, more of a balanced approach was actually a very welcome surprise for me.

Roman Dubczak: Yeah, very interesting. So government and environmental, about 40% each. By deduction, social’s getting 20%.You know, kind of how do we interpret that? And, you know, over the last 12 months, we’ve seen increased labour disruptions. Support for unions in North America is growing at its highest rate in 50 years. We’re coming out of the pandemic and organizations are spending more time on employee health and wellness. There’s great turnover, the great resignations, etc. It strikes me that the social is perhaps an area where there’s going to be a bit more emphasis on social aspects of investment allocation.

Shaz Merwat: Yeah, it’s undeniable that there are definitely social themes that are occurring within society that a lot of us have other concerns to or that you think are probably being under addressed. It is one of those things where to date it just hasn’t seen as much time. But I do think we are getting there, in my opinion, probably over the next 24 months we probably get an even split amongst the three. Call it 33, 33, 33.It’s important to remember that when we look at ESG governance, it’s probably the most mature of the themes that we’ve been looking at governance issues from investing, really since the 1990s.So it’s quite easy for investors to wrap their head around that. You know, on the environment, it was a bit tougher for investors at first, but over the last six or seven years, you’ve had global frameworks come out like TCFD or TNFD, and that’s really helped them think through how they should think about climate related risks and nature related risk. So it’s been those global frameworks that have helped kind of formulate some of those ESG themes.

Roman Dubczak: Okay Shaz, that’s actually interesting. On the social side, which seems to be the underserved yet evolving part of the equation. What do you think we can expect in terms of investors frameworks going forward?

Shaz Merwat: Yeah, So that’s been the one, like you said, where we haven’t seen anything yet, but that’s going to change. Yeah. So the International Sustainability Standards Board, also known as the ISSB, also, which will probably be the global defacto standard regulator for all ESG disclosure, they have come out with mandatory disclosures already. Last year was the first, but really they prioritized the climate related disclosures just because of where we are on climate change and managing emissions. But they will come out with a set of non-climate related mandatory disclosures this year. And it’s important to note that human capital is on that list. Items like, human rights and Indigenous rights specifically. So I believe once those standards come out and there’s a little bit more guidance on what “social” means, that’s when you’re going to see the uptick in time spent by investors looking at social considerations from an ESG perspective. All right. So it reminds me actually, we’ve got our Whistler Conference a few days away, and our colleague Lisa Raitt is going to be moderating a panel on how to expand the participation of Indigenous communities in major resource projects. So obviously, in Canada, you know, with the potential we have in the extractive industries, the role of Indigenous communities is at the top of the agenda for our country and our clients. So Shaz, before we conclude one last question, we started the discussion saying that ESG is mainstream, but in truth, it’s just recently become mainstream. And in many ways we’re still on the path to what you might call maturity. So what’s the next stage of ESG’s evolution?

Shaz Merwat: Yeah, Roman, agree with that assessment. Listen, I think some things will change and some things won’t change. Obviously, the need to reduce emissions as part of mitigating climate change, that’s a topic that’s not going away. Focusing on increasing diversity, both from a gender perspective and an ethnic perspective, at the corporate level, and at the board level. That’s obviously going to remain very topical too. What’s different this year, I think, is we’re going to see a greater focus on Indigenous rights within the social side. And then on the governance side, we’ve heard quite a lot about the opportunities with AI, but now we’re going to have to start thinking about the risks of how that is being deployed. And so what we refer to as ‘Ethical AI’, and that’s definitely going to be a conversation that’s going to be had in a lot of boardrooms. But if I’m to take all of that, maybe on the macro side, I think we’re now finally seeing global standards be put in place. As I mentioned already, the ISSB is already releasing mandatory disclosure. In Canada, we have the Canadian Sustainability Standards Board. They’re also on the pathway for mandatory ESG disclosure. California has already put out laws, as so has Europe across the Atlantic as well. So really, when you think of mandatory ESG disclosure, it’s either already here or it’s imminent. And I think that’s really the next stage of the evolution. I call it ‘Compliance Mode’. You know, investors have demanded robust standardized data. The standard setters are now providing with that. So corporates need to be aware that they’re going to have to rejig their accounting protocols and their audits to better streamline this ESG data into their reporting and into their financial reporting as well. I know ‘compliance mode’ can sound kind of boring, but the good news is that the pieces are coming together and, you know, sometimes Roman, I think boring is good.

Roman Dubczak: It’s a great way to end today’s discussion Shaz. ‘Compliance Mode’. I like that. And to some extent, yes, it may sound boring, but it also is concrete and it sort of sets the tone as to what our clients should be expecting and how their mindset should be going on this. And how their mindset should be evolving on this. – I agree. So well done on this year‘s survey. Thanks again and thanks for your leadership on the topic Shaz. It’s good to sort of see CIBC’s franchise out there leading the way on this entire conversation. So thank you all for joining us here today on the discussion on CIBC’s Fifth Annual ESG Investor Survey results. I hope you found this interesting. We look forward to ongoing discussions with you as you develop your plans and your strategies, and we hope to see you again soon. Thanks.